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FEATURE: Debt for hire

A number of real estate debt bigwigs are playing musical chairs, continuing a trend that started last year.

Several major real estate debt hires occurred in 2015, most notably at two private equity firms that entered the space for the first time. KKR recruited a team of investment professionals, led by Matt Salem, from Rialto Capital Management to launch its real estate debt platform, while TPG similarly poached staff from Deutsche Bank, and subsequently hired Greta Guggenheim, co-founder and chief investment officer at Ladder Capital, to head up its new business in the space. Meanwhile, Blackstone tapped Jonathan Pollack, Deutsche Bank’s former head of commercial real estate, to lead its Blackstone Real Estate Debt Strategies business, taking over from Michael Nash.

But recruiters say real estate debt hiring is far from over. Andrew Fein, a principal at Chicago-based executive search firm Heidrick & Struggles, asserts that last year’s recruits are only the beginning. “Last year, you saw the early movers for this wave, and I would expect to see a similar amount of capacity, which would be far greater than any previous years we’ve seen,” he said.

Fein is aware of at least four specific searches in the market for senior real estate debt professionals on the originations side, either to act as the head of a new debt business or to bulk up the firm’s existing capacity to do lending. “The companies are open to individuals or teams, depending on the talent,” he says.

Darin White, senior client partner in the New York office of executive search firm Korn Ferry, agrees that she is seeing a similar number of senior real estate debt searches in the market. “It’s still happening,” she says. “There are a number of fund managers that will announce new debt investment businesses in the coming months. There’s another wave, and the reality is there is still demand for this kind of product in the market. There aren’t enough players providing loans.”

Filling the gap

Indeed, traditional banks and commercial mortgage backed securities (CMBS) lenders are expected to pull back significantly on lending as a result of regulatory changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III.

The risk-retention requirements under the Dodd-Frank Act are expected to increase the cost of capital from CMBS lenders and Basel III is intended to make banks generally less aggressive, particularly with regards to construction lending.

Meanwhile, CMBS market activity has plummeted in the past year, falling from $105 billion last year to $27 billion in 2016 to date, according to data from investment research firm Morningstar.

“The impending risk-retention rules are going to create some opportunities for us. It’s going to be an interesting few years,” says Jamie Henderson, chief investment officer of alternative investments at Hartford, Connecticut-based Cornerstone Real Estate Advisers.

In June, Cornerstone agreed to purchase ACRE Capital Holdings, a lending subsidiary of Ares Commercial Real Estate Corporation and an originator and servicer of multifamily residential mortgages, senior housing and healthcare facility loans, for $93 million.

The acquisition of ACRE, which is expected to close as early as this quarter, would significantly expand Cornerstone’s commercial loan origination platform, nearly doubling the size of its multifamily loan portfolio and adding 106 employees, including 50 dedicated lending professionals.

Cornerstone is not the only firm that is seeking to ramp up or expand in the real estate debt space through an acquisition. Last month, Newton, Massachusetts-based alternative asset manager The RMR Group acquired Boston-based commercial real estate debt fund manager Tremont Realty Capital for $2.2 million.

“This acquisition may enable RMR to participate in what we believe is a growing need for lending to middle market commercial real estate borrowers at a time when banks and certain other traditional commercial real estate lenders have pulled back from this market as a result of increased regulation of their businesses,” said Adam Portnoy, RMR’s president and chief executive officer, in a statement at the time.

Meanwhile, other firms are hiring rather than acquiring new staff in the space. For example, New York-based real estate fund manager Fisher Brothers landed industry veteran Billy Jacobs to build a mezzanine debt platform in May.

Increased investor interest in real estate debt strategies has been a driver in the uptick in hiring. “It’s a product that is in demand by investors, as it seems to offer the right risk-return for where we are in the cycle,” says White. “Fund managers are aware of investor demand. They have created platforms and products to provide access to these debt investment opportunities for their existing and new investors.”

Indeed, investors have been allocating significant amounts of capital to real estate debt strategies. As of August, total private real estate debt fundraising in 2016 to date was $21.68 billion, higher than any other year in the past seven years except for 2013, when $33.93 billion was raised, and 2014, when fundraising reached $25.25 billion, according to PERE research.

Better talent pool

The lending gap has provided real estate fund managers not only with a new investment opportunity, but also a large pool of potential job candidates. “If they are going to hire, the specialty finance and non-banking platforms absolutely have a much better pool of candidates to attract,” says Jane Lyons, managing partner at New York-based executive search firm Rhodes Associates. “For the moment, it has swung in their favor.”

The real estate debt hires to date have been highly selective and targeted, notes Lyons. “These are very sophisticated investment managers making big bets for the long run with talent at the top of their game,” she says.

Strategically, several of Rhodes’ clients have expressed interest in entering or expanding in transitional financing, but are waiting to pull the trigger. That has left their immediate hiring plans in limbo, Lyons comments.

Also, despite the larger labor pool resulting from the attrition at banks, the candidates may not be a good fit for a real estate fund manager, Fein observes. “There’s a lot of talent, but it’s not necessarily the talent an investment manager is looking for, because the view is that bankers haven’t necessarily looked at lending and originating on the same risk-adjusted return basis as an investment manager would.”

Fein also adds that cultural fit is another consideration for a fund manager that is seeking to make new real estate debt hires. “Something investment management firms are cognizant of is how a team assimilates into the current environment of the investment management platform,” he says. “The team brings their own distinct culture. So does the firm do something to assimilate the team, or is it going to be a separate business and they will have their own separate culture? That’s something to consider when they decide to bring on a team or individual.”

With a number of moves afoot, the game of musical chairs among real estate debt executives does not appear to be ending any time soon.